Wednesday, June 30, 2010

Ditching the dollar

The Business Insider reports: "... The United Nations has slammed the U.S. dollar in a new report called Retooling Global Development. They're recommending an end to the dollar's role as dominant reserve currency, and pushing for a new global reserve regime based on a supranational currency made up of a basket of developed nation currencies.
While we've heard this kind of recommendation before, the UN is re-energizing its push. For example, they blame the financial crisis squarely on the dollar system...."
Full text
Comment: I fully agree. I am currently writing a paper about the origin of the current crisis (an ISI book edited by Thomas Woods) and it will give profound arguments for this position. I'll keep you posted on this.

Keynes on inflation

"...Keynes (1919 [1971], pp. 144, 149) laid responsibility for the inflation at the door of the “belligerent governments” during the war, most of whom were continuing to monetize their debts, rather than to pay for their expenditure by raising taxes or issuing loans. Whether due to “necessity or incompetence,” it was a policy which “a Bolshevist might have done by design.” The problem with ongoing inflation was that, with the arbitrary “rearrangement of riches” and wild fluctuations in prices it brought, confidence in the credit system would collapse, thereby undermining the “ultimate foundation of capitalism.” The disintegration would be
accelerated by the way that governments were attacking “profiteers” in an attempt to shift the blame for the inflation: “These ‘profiteers’ are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot help but get rich quick whether they wish it or desire it or not.” The European situation was now dire. Facing starvation, “Men will not always die quietly . . . in their distress [they] may overturn the remnants of organisation, and submerge civilisation itself.”
.. In the Economic Consequences, Keynes (1919 [1971], p. 160) was more sanguine, arguing that there was not “the slightest possibility of catastrophe or any serious likelihood of a general upheaval of society” in Britain. Keynes was, however, a vehement supporter of the increases in interest rates the Bank of England implemented in November 1919 and April 1920 (Moggridge, 1992, pp. 354–60). Indeed, when consulted by the Chancellor of the Exchequer in February 1920, Keynes (1920 [1977], p. 184) argued for an even tighter monetary policy, on the ground that continuing high inflation would “strike at the whole basis of contract, of security, and of the capitalist system generally.” As Donald Moggridge (1992, p. 359)  subsequently observed in his biography of Keynes, the “argument was that of the author of the Economic Consequences.”
Full text: Retrospectives: Who Said “Debauch the Currency”: Keynes or Lenin?
Michael V. White and Kurt Schuler

Tuesday, June 29, 2010

Economics is hard

The paper by Kartik Athreya is good stuff.:
http://www.scribd.com/doc/33655771/Economics-is-Hard
He adresses a serious problem: One may call it the Krugmanian confusion. Here you have an economist, Paul Krugman, who earned the so-called Nobel prize in economics yet what he is mainly famous for is a kind of diary for the New York Times. In these contributions he rarely gets things right. Indeed, in almost every piece that he writes, erros, sometimes even grave errors, can be found. Now, so it seems, Kartik wants Krugman and his minor followers to shut up. No, my friend, we won't do that. Krugman is a valuable asset in demostrating how wrong his Keynesian beliefs really are. There is no such thing as "science" in economics, yet, there is scholarship in economics, last represented by Hayek and Mises. Scholarship means knowledge and learning. It is the opposite of what Krugman and his minor compadres such as DeLong and Reich try to sell. Right, Kartik, your analysis is right, but let's not shut down Krugman, let's shut down the Fed.

Shut up, close down, go the way of the mad aunt

Ambrose is right:
"... Like a mad aunt, the Fed is slowly losing its marbles.
Kartik Athreya, senior economist for the Richmond Fed, has written a paper condemning economic bloggers as chronically stupid and a threat to public order.
And now the Fed tells us all to shut up. Fie to you sir.
The 20th Century was a horrible litany of absurd experiments and atrocities committed by intellectuals, or by elite groupings that claimed a higher knowledge. Simple folk usually have enough common sense to avoid the worst errors. Sometimes they need to take very stern action to stop intellectuals leading us to ruin...
Full text
Comment: I know several of these guys like Kartik. And now, if you should think he's an exception, I can tell that he is not. The discipline (not science) of economics has been brought down by exactly these types who now claim sainthood. Imagine guys like Kartik all over the place in institutions like the Fed, the State Department, and in almost any other of the many government agencies. In fact, neither Krugman nor DeLong nor Reich are very different from Athreya. Very strange attack because of these have Phds in economics from fairly "decent" institutions. And what these institutions produce is exactly the problem. No wonder that things come falling apart. It is interesting to note on a sideline that 39-year-old Athreya is a omni-present gatekeeper who, according to his CV is a referee for American Economic Review, Journal of Political Economy, Journal of Monetary Economics, Review of Economics and Statistics, Journal of Public Economics, Journal of Economic Dynamics and Control, Journal of Money, Credit, and Banking, Contemporary Economic Policy, Southern Economic Journal, The Quarterly Review of Economics and Finance, Journal of Macroeconomics,
B.E. Journal of Macroeconomics.
Now I understand more clearly why I stopped reading these journal years ago.

Scapegoat Germany II

Mathew Lyinn from Bloomberg explains: "Who is to blame for the state of the world economy? To listen to a range of presidents, investors, pundits and finance ministers, just one country: Germany.
... It is all crazy...
Full text

Scapegoat Germany I

Amity Shlaes gets it right: "... George Soros has been making what he calls a “grave accusation” against Germany. The financier- philanthropist said last week that Germany is endangering the European Union by keeping wages down and pursuing a balanced national budget too aggressively. Germany’s parsimonious attitude, Soros suggests, may bring down the euro.
... It is time to turn the question around, and make a grave accusation against Soros. It is Soros who is endangering the euro by advocating these spending and loosening policies. They are policies that may give Europe budget problems that render its currency vulnerable to attack by Soros-like traders. Perhaps, like Merkel, Soros is doing his endangering for understandable reasons. Nonetheless, the danger is there, and worth laying out..."
Read more
Comment: It's good to read, at least once in while, some reasonable commentary in the American financial press. Insider trader Soros is a hypocrite. While playing a self-styled savior of the common European currency, he is actually keen on knocking the euro out for good. In contrast to the British pound, the euro doesn't serve as a toy for the currency speculators who have burnt their fingers recently by their ill-fated attempt to explode the eurozone and go after its parts.

Financial cosmetics

From The WSJ: "... Congress is planting the seeds of the next big bank bailout.
Attention is focused on the House-Senate conference on a once-in-a-generation rewrite of the rules of finance. Meanwhile, a provision added, almost unnoticed, to a help-small-business bill that passed the House last week would allow all but the 100 largest banks to pretend they haven't made bad loans. The goal is to prompt them to lend more readily to small businesses.
The provision would permit more than 7,800 banks, with nearly $3 trillion in assets among them, to spread losses on bad real estate loans over six to 10 years instead of recognizing reality immediately..."
Full text 
Comment: Sound money, sound banking, sound accounting. It is all gone. What we have insead is a corrupt monetary system, frivolous banking and fraudulent accounting.

Monday, June 28, 2010

Debt dynamics

"... Even if adverse debt dynamics can be avoided, three key factors that accompany higher levels of public debt may lead over time to a reduction of potential economic growth and a fall in living standards: higher interest payments, greater competition for portfolio investment and the impairment of fiscal policy..."
BIS Annual Report 2010, p. 69

Public debt

"... High levels of public debt are not unknown in the industrial countries. In the wake of the Second World War, for example, public debt reached about 120% of GDP in the United States and 275% of GDP in the United Kingdom. In those two countries, where levels of public debt are projected to reach upwards of 90% of GDP in 2011, the recent rate of increase parallels only that seen during the two world wars (Graph V.2, left-hand panel). What is worse, the current, crisis-related surge took place against the backdrop of a long-term erosion of
the fiscal position in many countries. Indeed, from the 1970s to 2007, the collective average public debt ratio in industrial countries had steadily ratcheted up from 40% to 76% (Graph V.2, right-hand panel). The chronic
mismatch between revenues and committed expenditures (particularly agerelated spending) indicates that, to varying degrees by country, the fiscal situation was already on an unsustainable path before the beginning of the recent financial crisis.
By the end of 2011, public debt/GDP ratios in industrial countries are projected to be on average about 30 percentage points higher than in 2007 – a rise of about two fifths. But the increase for countries that have been hit particularly hard by the crisis will be even greater: for the period from the end of 2007 to the end of 2011, the debt/GDP ratio is expected to rise by more than half in the United States and by four fifths in Spain and to almost double in the United Kingdom and triple in Ireland (Table V.1). The recent increase in public debt is unlikely to be halted any time soon, for a number of reasons..."
BIS Annual Report 2010, p. 62

Fiscal malaise

"... Remarkable declines in national incomes, large financial rescue programmes and expansionary fiscal policies in the wake of the financial crisis have led to a dramatic deterioration of fiscal positions in industrial economies (Graph V.1). The aggregate public debt of the advanced economies is projected to rise from 76% of GDP in 2007 to more than 100% in 2011 – a record high in recent decades. Moreover, the full cost of cleaning up the balance sheets of financial institutions – particularly against the backdrop of their continued high vulnerability to adverse shocks – is not yet known. And beyond 2011, many industrial countries face the large, rising pension and health costs associated with their ageing populations. Unless tackled effectively and in a timely manner, such costs could lead to ever increasing deficits and debt levels..."
BIS Annual Report 2010

Bankers beware

"... Low policy rates in combination with higher long-term rates increase the profits that banks can earn from maturity transformation, ie by borrowing short-term and lending long-term. Indeed, part of the motivation of central banks in lowering policy rates was to enable battered financial institutions to raise such profits and thereby build up capital. The heightened attractiveness of maturity transformation since the crisis was reflected in rising carry-to-risk ratios in 2009 and early 2010 (Graph II.1, bottom right-hand panel). Increasing government bond yields, caused by ballooning deficits and debt levels and a growing awareness of the associated risks, make the yield curve even steeper and reinforce the appeal of maturity transformation strategies.
However, financial institutions may underestimate the risk associated with this maturity exposure and overinvest in long-term assets.5 As already noted, interest rate exposures of banks as measured by VaRs remain high. If an
unexpected rise in policy rates triggers a similar increase in bond yields, the resulting fall in bond prices would impose considerable losses on banks. As a consequence, they might face difficulties rolling over their short-term debt..."
BIS annual report 2010, p. 41

The risks of low interest rates

"... Previous episodes of low interest rates suggest that loose monetary policy can be associated with credit booms, asset price increases, a decline in risk spreads and a search for yield. Together, these caused severe misallocations of resources in the years before the crisis, as evidenced by the excessive growth of the financial industry and the construction sector. The necessary structural adjustments are painful and will take time..."
BIS 2010, p. 38

Monetary policy

"... Central banks around the world first reacted to the economic downturn caused by the financial turmoil by aggressively cutting interest rates. As a result, policy rates in the main advanced economies range currently between zero and 1%, leaving little to no room for additional cuts to accommodate any further negative shocks (Graph III.1). In real terms, rates are around zero in the euro area and negative in the United Kingdom and the United States. In Japan, by contrast, mild deflation has pushed real rates just above zero again..."
From the BIS annual report

From the BIS 2010 annual report

"... The level of public debt in many industrial countries is on an unsustainable path. Current budget deficits, partly cyclical but also swollen by policy responses to the crisis, are large in relation to GDP. And expenditures related to ageing populations are set to increase considerably over the next few decades. Recent events in Greece and other southern European countries have shown how quickly investors’ doubts about the ustainability of public finances in one country can spill over to others. In addition, high levels of public debt may lower long-term economic growth and ultimately endanger monetary stability..."
Full text

Iran's oil supplies



OPEC Warns War With Iran Would Cause 'Unlimited' Oil Price Hike

Saturday, July 12, 2008              Addressing one — the threat of a U.S. or Israeli attack on Iran because of its nuclear defiance — he warned that his organization was unprepared — and unable — to make up for resulting oil shortfalls.
"It is impossible to replace the production of Iran," OPEC's No. 2 producer, Abdalla Salem El-Badri told reporters at the presentation of the organization's long term oil market outlook. “The prices would go unlimited ... I can’t give you a number.”
The United States and Israel have not ruled out a military strike on Iran as a last option if it does not give up uranium enrichment and heed other U.N. Security Council demands meant to dispel the fear Tehran wants to make nuclear arms.
Tehran produced just over 4 million barrels of crude a day last year — more than 10 percent of OPEC's total production...
Full text
Comment: Sometimes one says as rhetorical figure that this or than implies "unforeseen consequences", yet this formula may exactly express was is in in the case of a military attack on Iran.

A rigged game

Wall Street's secret advantage: High-speed trading

They're unknown and invisible to most of us, but electronic trading programs now rule the stock markets

High-speed trading accounts for up to 70 percent of trading in shares listed on the NY Stock Exchange.
High-speed trading accounts for up to 70 percent of trading in shares listed on the NY Stock Exchange. Photo: Corbis
What is high-speed trading?
It’s Wall Street’s winning edge. By harnessing massive computer power to buy and sell stocks in the blink of an eye, high-speed traders leverage tiny changes in value to make huge profits. The technique was pioneered in the early years of this decade by a hedge fund that hired astrophysicists, mathematicians, and statisticians to devise electronic trading programs. Other firms, including Goldman Sachs and Credit Suisse, quickly followed suit. Few outside the securities industry knew much about the practice until computer glitches helped cause the Dow to plummet 600 points in 15 minutes in May. But high-speed trading—also called high-frequency trading—now accounts for up to 70 percent of all trading in shares listed on the New York Stock Exchange.
...
 How does it work?
Automatically. High-speed trading firms, from Wall Street powerhouses like Goldman Sachs to little-known shops with a handful of employees, program their computers to scan markets and exploit ephemeral price differences on the same stock trading on different exchanges. Their computer algorithms automatically generate thousands of transactions per second to profit from a price difference. For a fee, many stock exchanges even allow high-speed traders to get a few milliseconds’ preview of orders of 10,000 or more shares, giving them added incentive to handle unwieldy orders. “It is a rigged game,” says Sal Arnuk of Themis Trading, a brokerage firm. Some high-speed traders go one step further, paying a stock exchange for the right to install computer servers right next to the exchange’s own servers, a practice known as “co-location.”
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Comment: High-speed is nothing more than good old-fashined arbitrage. What makes it different is the impact on the market, yes, and speed itself. Herein lies the problem. This kind of trading is as if a Formula 1 car showed up in regular commuter traffic. Technical crashes will become more frequent. At the micro level this rapid arbitrage makes the market more "efficient", but at the macro level the market becomes more mindless. A mega crash is only a question of time. Yet when the big one comes, the problem arises: who will (can) pay? A global chain reaction will affect every financial instrument, across all asset classes, countries and currencies.

Learning about gold

Check data show here

Obama writes a letter

 
THE WHITE HOUSE
WASHINGTON
June 16, 2010
Dear G-20 Colleagues:
When we met in London in April of 2009, we were facing the worst worldwide economic financial crisis since the 1930s. We acted with unprecedented speed and aggressive action to boost demand and repair our financial systems. It worked.
.....
Read more: http://www.america.gov/st/texttrans-english/2010/June/20100621111451bpuh0.780769.html#ixzz0sBS9Q0vo

Towards maximum quantitative easing

RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve 

As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve.

Entitled "Deflation: Making Sure It Doesn’t Happen Here", it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.
The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost."
Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE).
... Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. "The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant," he said.
... It is sobering that zero rates, QE a l'outrance, and an $800bn fiscal blitz should should have delivered so little. Just as it is sobering that Club Med bond purchases by the European Central Bank and the creation of the EU's €750bn rescue "shield" have failed to stabilize Europe's debt markets.
... The trauma has merely been displaced from banks, auto makers, and homeowners onto the taxpayer, lifting public debt in the OECD bloc from 70pc of GDP to 100pc by next year. As the Bank for International Settlements warns, sovereign debt crises are nearing "boiling point" in half the world economy.
Fiscal largesse had its place last year. It arrested the downward spiral at a crucial moment, but that moment has passed. There is a time to love and a time to hate, a time for war and a time for peace. The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan. The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes.
Comment: Bernanke will do all he can to avoid deflation, his greatest nighmare. It is quite likely that he will succeed in this endeavor. Yet the price to pay will be hyperinflation. In a couple of years Bernanke we may well experience Bernanke to proclaim: "Operation successful - patient dead."

Krugman in tears

Paul Krugman whines "... And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending..."
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Comment: It is well known that Paul Krugman has a problem with facts. How can he writes such nonsenese as quoted above when deficits are exploding everywhere? I guess he even believes that the reason for the outbreak of the current recession was "inadequate spending" from 2000 to 2007.

Sunday, June 27, 2010

Words versus action

Dollar's Biggest Rally Since '05 Buckles as Strategists Draw Line at $1.20 By Liz Capo McCormick - Jun 27, 2010 

"... Futures traders are unwinding record bets that the dollar will rally. The number of contracts hedge funds and other large speculators hold betting on a rise in the dollar versus a fall against currencies traded at the Chicago Mercantile Exchange declined by 70 percent to 49,335 in the week ended June 22 from the peak of 163,085 on June 8, according to Washington-based Commodity Futures Trading Commission data..." 

Comment: While the speculators are retrenching from their wrong bets, the battle of words continues with more hype than substance -- nothing new under sun. 

Saturday, June 26, 2010

This is how it is

" ... Although its citizens pay more for health care, the United States ranks last on several measures of health system performance compared with six other industrialized nations, according to a new report.

Australia, Canada, Germany, the Netherlands, New Zealand and the United Kingdom all beat out the United States when it came to health care quality, efficiency, access, equity and the ability for citizens to lead long, healthy lives, says the report, from the Commonwealth Fund..."
Full text 
Comment: I don't believe a word of it. On the other hand, I also don't believe that American universities are that good as some rankings say. One can make up any rating any way one likes the rating to be, be it health or education or whatever.

Friday, June 25, 2010

A US reality check

1. This year, the US government will take up almost as much debt as the rest of the world taken together. (IMF)
2. US total debt to GDP stands at 360 per cent. (Pimco)
3. 33 out of the 50 US States have depleted unemployment funds. (National Employment Law Project)
4. There will be 3.8 million foreclosures in 2010; 38 per cent more than last year. (Reality Trac)
5. Commercial property prices have fallen 40 per cent since 2007. (Congressional Oversight Panel)
6..While the official unemployment rate stands at 9.7 per cent, the overall rate stands at 18.4 per cent. (Gallup)
7. 40 million Americans are on food stamps. (US Department of Agriculture)
8. 2010 is the first of the coming years when social security will have more outlays than receipts.  (US Congress)
9. Calculating price inflation with the former methodology would show negative economic growth for the US economy. (Shadow Statistics)
10. The effect of addtional debton gdp growth has become close to zero (see chart).

The worst is yet to come

Ambrose Evans-Pritchard, International Business Editor writes Published: 9:44PM BST 24 Jun 2010
"... Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.
Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts..."
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Comment: Once upone a time one used to say: it will get worse before it gets better; now it is the other way around, things got a little better for a while only to get much worse from now on. 

Thursday, June 24, 2010

Euro weakness accelerates export boom

Bloomberg June, 24, 2010
“... The trade recovery is now gathering momentum on the back of strong import demand in emerging markets,” the European Commission, the EU executive, said today in its quarterly assessment of the euro-region economy. “Euro-area exports will be further stimulated by the recent depreciation of the euro.”
... The 16-nation currency’s “real effective exchange rate has lost close to 10 percent” since its peak in October, the Brussels-based commission said. Against the U.S. dollar, the euro has fallen 19 percent since its Nov. 25 high, trading today at $1.2279 after reaching a four-year low of $1.1877 on June 7.
“The depreciation, if it persists, could boost exports by about 5 percent, with much of the gains taking place already in 2010,” according to the report....
Full text
Comment: Sometimes I think it is not just ignorance but outright envy or hate or some other strange emotional condition that prevents some analysts to recognize the correct fundamentals of the euro zone. Krugman, certainly, is a freak. Recently in Israel, he said: “On the inflation side, the Germans do worry a lot about inflation and basically that’s because they’re crazy”. Dear Paul, better take care and watch out what will come upon you when the US will be mired in hyperinflation. History clearly shows that it is hyperinflation more than anything else that robs people of the last traces of rationality. Any economist who does not know about the dangers of inflation is not worth his penny least a Nobel Prize, even a fake one.

Wednesday, June 23, 2010

Thank you, Obama

WASHINGTON (Reuters) – President Barack Obama's job performance rating has dropped to the lowest level of his presidency as Americans grow less confident in his leadership, according to an opinion poll published on Wednesday.
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Comment: We should be thankful for Obama's low ratings. Imagine Obama being a successful president with high ratings. Then people might actually believe that politics could do something good for them. Thanks, Obama, for showing the opposite. Thank you, Obama, for showing what politics is all about. Thank you, Obama, for showing the mean character of politics so drastically that even your fanclub may notice. Maybe people may learn from your performance what modern politics is really all about and that it is nothing but an ugly web of special interest groups who have only one thing in mind: pushing their agenda forward without any concerns beyond their specific aims.

The next wave of sovereign debt defaults

Sovereign debt defaults come in waves. The pattern shows that the next wave is on its way and may well reach former tops of 40 to 50 % of countries in default. This time, however, the list will not be limited to third world countries but most likely include also the top global players.
Read more about the global debt bomb

Collective financial suicide

The Global Debt Bomb
Daniel Fisher, Forbes Magazine dated February 08, 2010
"... The world has issued so much debt in the past two years fighting the Great Recession that paying it all back is going to be hell--for Americans, along with everybody else. Taxes will have to rise around the globe, hobbling job growth and economic recovery. Traders like Bass could make a lot of money betting against sovereign debt the way they shorted subprime loans at the peak of the housing bubble.
National governments will issue an estimated $4.5 trillion in debt this year, almost triple the average for mature economies over the preceding five years. The U.S. has allowed the total federal debt (including debt held by government agencies, like the Social Security fund) to balloon by 50% since 2006 to $12.3 trillion. The pain of repayment is not yet being felt, because interest rates are so low--close to 0% on short-term Treasury bills. Someday those rates are going to rise. Then the taxpayer will have the devil to pay..."
Full text
Comment: To see how absurd things have become watch out for the Toronto summit this weekend when  US government officials and their academic claqueurs will anounce that even more debt is needed and when they will scream for more debt from Europe and the rest of the world like small children do for icecream. Welcome on board of the ship of fools that is heading towards collective financial suicide.

Tuesday, June 22, 2010

The right move

Bloomberg: The Australian and Canadian dollars are becoming reserve currencies for central bankers seeking alternatives to deteriorating government credit quality in Europe, the U.S. and Japan...
Full text
Comment: Along with the loonie, gold will also gain in importance in this process of diversification. While the euro has never gained considerable status as a reserve currency, the dollar's prominence will diminish.

There Is no US of America anymore

Paul Craig Roberts explains:
"... Unlike some countries, the US is not an ethic group. It is a collection of diverse peoples united under the Constitution. When the Constitution was destroyed, the US ceased to exist. What exists today are power centers that are unaccountable. Elections mean nothing, as both parties are dependent on the same powerful interest groups for campaign funds. The most powerful interest groups are the military/security complex, which includes the Pentagon, the CIA, and the corporations that service them, the American-Israel Public Affairs Committee, the oil industry that is destroying the Gulf of Mexico, Wall Street (investment banks and hedge funds), the insurance companies, the pharmaceutical companies, and the agri-companies that produce food of questionable content..."
Comment: Indeed, and Roberts' argument confirms my reasoning why I am more pessimistic as to the future of the USA than that of Europe. Even despite massive immigration, most of the European states will maintain a deep-rooted national identity that continues despite whatever changes in the formal legal settings and is able to survive the most horrible catastrophies.

Monday, June 21, 2010

Triple digit Dow

Elliot Wave predicts triple-digit Dow in 2016 
Commentary: If you think things are bad now...
By Peter Brimelow , MarketWatch
"... Stock market bulls and most economists think that a new bull market and economic recovery are underway. Most bears are looking for either a long sideways bear market à la 1966-1982, or a hyperinflationary run to infinity. Our Elliott Wave outlook opposes both of these scenarios. The most likely profile is a stock market crash of historic proportions." 
Comment: I can't help myself nor anybody else. Nobody knows FOR SURE how things will play out. I agree with Prechter that the fundamentals point to deflation, the natural way of things to go after the debt excesses of the past couple of decades. On the other hand I see the role of the authorities and their endeavors to turn the boat from deflation to inflation. Prechter's thesis basically says: the authorities will fail, and because they will fail, they have made things worse than they otherwise would be. If the authorities won't manage to bring about a new inflation, a new deflation will happen and because of the (failed) market invention by the authorities, things will get much worse than otherwise with the expectation, indeed, that the Dow will go down to triple digits.

It's just the beginning of a never-ending journey of cuts

In Budget Crisis, States Take Aim at Pension Costs
by Mary Williams Walsh
Monday, June 21, 2010
provided by
The New York Times
Many states are acknowledging this year that they have promised pensions they cannot afford and are cutting once-sacrosanct benefits, to appease taxpayers and attack budget deficits.
Illinois raised its retirement age to 67, the highest of any state, and capped public pensions at $106,800 a year. Arizona, New York, Missouri and Mississippi will make people work more years to earn pensions. Virginia is requiring employees to pay into the state pension fund for the first time. New Jersey will not give anyone pension credit unless they work at least 32 hours a week.
"We can't afford to deny reality or delay action any longer," said Gov. Pat Quinn of Illinois, adding that his state's pension cuts, enacted in March, will save some $300 million in the first year alone.
But there is a catch: Nearly all of the cuts so far apply only to workers not yet hired. Though heralded as breakthrough reforms by state officials, the cuts phase in so slowly they are unlikely to save the weakest funds and keep them from running out of money. Some new rules may even hasten the demise of the funds they were meant to protect..."
Full text
Comment: Greece is everywhere. We've finally come to the point where the welfare state must end. This is a story that could be foreseen decades ago. And now it is also clear that we are only taking the very first small steps in a long journey of cuts, be it pensions, schools, health care, you name it. For too long too many have succumbed to the status of sheeples. They have rendered to debt, the modern form of slavery. The pied pipers continue blowing their seductive tunes but in the end reality, in this case a bitter reality, will take over.

Gold reclaims its historic role

Ambrose Evans-Pritchard reports: "The World Gold Council said on Friday that the central banks of Russia, the Philippines, Kazakhstan and Venezuela have been buying gold, and Saudi Arabia’s monetary authority has "restated" its reserves upwards from 143m to 323m tonnes. If there is any theme to the bullion rush, it is fear that the global currency system is unravelling. Or, put another way, gold itself is reclaiming its historic role as the ultimate safe haven and benchmark currency.
It is certainly not inflation as such that is worrying big investors, though inflation may be the default response before this is all over. Core CPI in the US has fallen to the lowest level since the mid-1960s. Unlike the blow-off gold spike of the Nixon-Carter era, this rally has echoes of the 1930s. It is a harbinger of deflation stress.
Capital Economics calculates that the M3 money supply in the US has been contracting over the past three months at an annual rate of 7.6pc. The yield on two-year Treasury notes is 0.71pc. This is an economy in the grip of debt destruction.
Albert Edwards from Societe Generale says the Atlantic region is one accident away from outright deflation - that 9th Circle of Hell, "abandon all hope, ye who enter" . Such an accident may be coming..."
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Comment: Indeed, dear Ambrose, deflation would be the natural way of the economy to move to. It would punish, and rightly so, greedy debtors and lenders, and indeed put them into the 9th Circle of Hell. But nowadays we have a treacherous savior at hand: governments and central banks. They will do all they can to avoid deflation. In fact, they will try that hard that in the end they most likely will not only bring about moderate or sutbstantial inflation, as they want to, but hyperinflation, and it is really hyperinflation which the devil dearly wants, because in times of hyperinflation all morality gets lost and people lose their minds.

The origin of global monetary inflation

Source
Hugo Salinas Price writes about the Consequences of abandoning the gold standard: "...  The consequences of that fateful day (of abandoning the gold standard in 1971) have overthrown all order and harmony in economic relations among the nations of the world, while facilitating and expediting the global expansion of credit because part of the dollars exported by the US ended up in the reserves of Central Banks around the world..."
Comment: After the final cut of the link to gold in 1971, inflation in its original sense as an inflating monetary mass, took off at an ever accelerating speed producing along its way one financial crisis after the other until moving towards the final act of the modern drama of fiduciary money with the current sovereign debt crisis.

Buried under the avalanche of medicare costs

Fed economist Richard W. Fisher has some sobering math to tell:
"...
Please sit tight while I walk you through the math of Medicare. As you may know, the program comes in three parts: Medicare Part A, which covers hospital stays; Medicare B, which covers doctor visits; and Medicare D, the drug benefit that went into effect just 29 months ago. The infinite-horizon present discounted value of the unfunded liability for Medicare A is $34.4 trillion. The unfunded liability of Medicare B is an additional $34 trillion. The shortfall for Medicare D adds another $17.2 trillion. The total? If you wanted to cover the unfunded liability of all three programs today, you would be stuck with an $85.6 trillion bill. That is more than six times as large as the bill for Social Security. It is more than six times the annual output of the entire U.S. economy.
Why is the Medicare figure so large? There is a mix of reasons, really. In part, it is due to the same birthrate and life-expectancy issues that affect Social Security. In part, it is due to ever-costlier advances in medical technology and the willingness of Medicare to pay for them. And in part, it is due to expanded benefits—the new drug benefit program’s unfunded liability is by itself one-third greater than all of Social Security’s
Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent...
Comment: Most people in our modern populist democracies aren't ready to give any attention to analyses like that. Most people just keep going on, giving their votes to those who promise most and deliver least. We live in the age of the sheeples, indeed. We only may wish that more economists like Richard Fisher were around as a countweight against the likes of Krugman et al. in order to increase the odds in favor of economic sanity.

The final nail for the bond market?

--- Global markets fear US Treasuries sell-off as China ends currency freeze. 
Global markets are braced for a possible sell-off in US Treasury bonds after China said over the weekend that it will allow the yuan exchange rate to adjust against the dollar, ending a two-year currency freeze that has led to trade clashes with Washington and Brussels... 
Read more 
Comment: I've been waiting for a bond market collapse for such a long time that I almost lost my faith in the meantime. However, I know that markets not rarely may behave irrationally not only for a short period of time, but for a long period of time, such a long period of time, indeed, that one (if anyone is still left) is about to lose his mind, too. That has been the case with the performance of the bond markets. Has the time now come for the bond market crash? I do not know, but I am ready to jump the wagon.

Greenspan's neer endling list of errors

Watch Alan Greenspan's Slide Into Oblivion: The Complete Guide. See this slide show and learn more about who are your clueless rulers: 

I showed you the way and here we go

"... Former Fed Chair Alan Greenspan has an op-ed in the WSJ arguing that the runaway Federal Deficit threatens to turn the US into the next Greece...
Read more

Sunday, June 20, 2010

One, two many Greece

 -- “People think we’re becoming a Third World country,” said Ms. Sims, 55. “They don’t understand.”
It’s a story that’s being repeated all across California – and throughout the United States – as cash-strapped state and local governments grapple with collapsed tax revenues and swelling budget gaps. Mass layoffs, slashed health and welfare services, closed parks, crumbling superhighways and ever-larger public school class sizes are all part of the new normal.
California’s fiscal hole is now so large that the state would have to liberate 168,000 prison inmates and permanently shutter 240 university and community college campuses to balance its budget in the fiscal year that begins July 1.
Think of California as Greece on the Pacific: bankrupt and desperately needing a bailout...
Comment: In the meanwhile the euro is moving back towards 1.25 - well, anyway, more than anything else the Greek comedy has shown drastically how far away we have moved from sound assessment. Wisdom, prudence (in the classical sense), circumspection, sound scholarship, all of that is lacking while the clattering class babbles louder every day.

Thursday, June 17, 2010

Return of reason

Jacob Kirkegards asks: "How can a majority of 25 City of London economists conclude that “a euro break-up of greater or lesser proportions during the next Parliamentary term” – within five years , in other words – is likely?"
and explains "Not according to the economic and political facts ..."
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Comment: Finally there is a commentator who brings reason back into the debate that has gone completely mad and has been overly dominated by prominent madmen who have bombarded us for months with relentless clattering, lack of substance and outright errors of analysis. I highly recommend reading Jacob's full text.
Kirkegaard: The Euro Is Safer than Ever – Here's Why
Published: Wednesday, 16 Jun 2010
8:22 AM ET Text Size By: Jacob Funk Kirkegaard
Research Fellow, Peterson Institute of International Economics

US jobless claims on the rise

June 17 (Bloomberg) -- The number of Americans seeking jobless benefits last week unexpectedly rose to a one-month high, indicating firings are staying elevated even as the U.S. economy grows...
“The labor market is not improving,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York. “If you really are going to have a sustainable recovery, you need the labor market to improve.” 
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Comment:  More than anything else does the US need a weaker dollar to achieve a recovery. Given the indebtedness of the US consumer, it is mainly only exports that could pull the US economy out of the slump.

The relentless growth of the derivatives bubble

"... JPMorgan Chase, the largest dealer, borrowed at an average rate of 0.08% in the fourth quarter of 2009 thanks to the aforementioned subsidies, which it has been using to pile up derivatives with a notional value nearing 50 times that of its assets. Ever wonder what banks are doing with all that cheap capital the Federal Reserve provides them in lieu of small business lending? Look no further..." Source


German economy expands - euro rises - Spanish bonds advance

June 17 (Bloomberg) -- The Kiel-based Institute for the World Economy raised its growth outlook for the German economy this year, saying the weakening euro is helping boost demand for German manufactured goods.
The German economy, Europe’s biggest, will expand 2.1 percent this year, the institute said today in an e-mailed report, after forecasting 1.2 percent growth in March.
“Economic dynamism in the first half of the year is probably much higher than we estimated in March,” the institute said today in an e-mailed report.
Source
June 17 (Bloomberg) -- European stocks and U.S. index futures gained and the euro strengthened as a Spanish bond sale eased concern the government will struggle to finance its burgeoning deficit. ... The euro rose, mirroring the gain in the S&P 500 futures index. The currency advanced 0.5 percent to $1.2374, and 0.4 percent to 112.99 per yen...
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Comment: I guess that news like that will simply be ignored by the chattering class of the US economics pundits who, unfortunately for the US financial and business community, still receive way too much of an undeserved hearing.

Wednesday, June 16, 2010

The new normal takes shape

"... Democracy could ‘collapse’ in Greece, Spain and Portugal unless urgent action is taken to tackle the debt crisis, the head of the European Commission has warned.
In an extraordinary briefing to trade union chiefs last week, Commission President Jose Manuel Barroso set out an ‘apocalyptic’ vision in which crisis-hit countries in southern Europe could fall victim to military coups or popular uprisings as interest rates soar and public services collapse because their governments run out of money...
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Comment: The words by Commission President Barroso are not fantasy. Worse: it is not only Europe that is threatened but the whole world. The grand failure of populist democracy, the decade-long love affair with debt, a culture of infantilization and the corruption of science and education now begin to bear their deadly fruits.

Silly words sold as analysis

June 16 (Bloomberg) -- The euro may extend its decline to a level last reached in 2003 on Europe’s sovereign-debt crisis, according to Sophia Drossos, co-head of global currency strategy at Morgan Stanley.
The shared currency will fall as much as 9 percent to $1.12 as the market forces the 16 member nations to rein in spending on programs such as welfare and retirement benefits, Drossos said in a radio interview today with Tom Keene on “Bloomberg Surveillance.”
“There are structural problems in Europe that aren’t going away any time soon,” said Drossos. “The euro still has further to decline.”...
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Comment: What is this lady talking about? What are "structural problems"? I guess anyone has some. Anyway, the exchange rate of a currency is not determined by "structural problems", but by such things as relative trade performance and relative interest rates along with some general consideration about financial and socio-political stability. Where are the weaknesses here of the eurozone compared to major other currency areas? The euro area's position to the rest of the world, for example, is largely free of trade imbalances or debt. Interest rates are slightly higher. Finally, much more could be said about financial and socio-political stability in the eurozone compared to the US and other parts of the world. The euro has one thing in common with the other currencies, and that is that it is a fiduciary money based on fractional-reserve banking. Therefore not more trust shold be put into the euro than in any other currencies. However, as one must keep money in some kind of curreny, and any currency that is available is a fiduciary money, one should prefer the money of a region that is not in debt with the rest of the world. What makes the dollar inherently weaker than the euro is exactly this: that in the long run the US cannot maintain their payment ability against the asset holders abroad and must willingly or not resort to inflate the dollar. All major currencies have an internal debt problem of extreme proportions. Yet in addition to its internal debt problem, the dollar has also a massive external debt problem. Before the euro breaks down, the US dollar will come down.

The bubble of higher education

A former student, now unemployed, writes: "... since 1987, higher education expenses have gone up 450 percent, while personal income in this country has gone up 87 percent, making tuition IMPOSSIBLE to afford without special financing. But, during this time, you were thriving because people could come up with the cash in two ways:
1. Get a home equity loan and use the inflated value of their house to pay for their kid to get drunk and/or raped at your school and then lose the house when the market crashed.
2. Get a federal loan.

... Oh yes, federal loans. I've got $40,000 of those, which are in "forbearance" right now because I'm unemployed, meaning that the feds are paying the interest for a while, which is convenient for me, but not for our government which is now owned by China....
Really, that's about all you did for us – gave us a lecture hall, gave us an arrogant bastard to listen to, and gave us a room full of computers we could use sometimes, and you gave us a degree that employers look at and say "This guy knows how to write reports. Amusing." And I will be paying for this privilege until I am 51 years old..."
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Comment: Just imagine the waste of money and time attending classes held by Robert Reich (Harvard) or Paul Krugman (Princeton) and a host of other so-called "academic" economists. Being myself an economist, though of a different kind, with the roots of my education in continental Europe, I  am simply horrified of what has been going on over the past decades in US education, at least in economics and business, in the areas that I am familiar with, yet I am told it is not much different in other disciplines, maybe even worse.

Tuesday, June 15, 2010

Late-comers, too, have a chance

June 15 (Bloomberg) -- The euro may appreciate to the highest level in three weeks as investors close out bets for declines in the shared currency, according to Barclays PLC.
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Comment: Welcome on board Barclays, took some time to wake up, I guess.
I still wonder why so many of these failed prognosticators, first among them their lead bull, Krugman, can still stay in business after so many blatant failures. Maybe it is because nobody cares anyway. The clattering class. The fog throwers. Leaders of the sheeples. Anyway, it is sad, intellecutally, so to speak.

Euro-dollar exchange rate on the right course

EUR-USD    1.2328 0 
 
   

Monday, June 14, 2010

Green shoots or white mushrooms?

What Happened to the Green Shoots?
by Daniel Indiviglio
Monday, June 14, 2010
provided by
atlantic_logo.gif
The economic reports for May are rolling in, and so far they're pretty ugly. In the first four months of 2010, it seemed pretty clear that a recovery was upon us, though it was shaping up to be a slow one. Last month, however, the economy seemed to take a step back. Was it a blip, or a sign of a double-dip to come?
Even though we don't yet have full information to evaluate May, here's what we do know: ---
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Comment: Chairman Bernanke is more on white mushrooms than green shoots, so it seems.

Junk rating

June 15 (Bloomberg) -- Greece’s credit rating was cut to non-investment grade, or junk, by Moody’s Investors Service, threatening to further undermine demand for the debt-strapped nation’s assets as it struggles to rein in its budget deficit.
In making the four-step downgrade to Ba1 from A3, Moody’s cited “substantial” risks to economic growth from the austerity measures tied to a 110 billion-euro ($134.5 billion) aid package from the European Union and the International Monetary Fund. The lower rating “incorporates a greater, albeit, low risk of default,” Moody’s said in a statement yesterday in London. The outlook is stable, it said...
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Comment: Even a short investigation into the history of these rating agencies will teach you that more than Greek bonds, the ratings itself are junk. It is only their ignorance of the guys (& girls) who write these junk assessments that is surpassed by their arrogance. One is reminded of what once said about August Comte: It is well known that Comte was a madman, but what about his followers? This is not the only thing that Comte and the rating agencies have in common. Interestlingly enough, Moody's, S&P, and Fitch use Comte's positivist methodology which is already by itself a sign of madness.

Idealization of home ownership or debt?

From the New York Times:
"... the financial crisis might well have been avoided if we as a culture hadn’t invested so much political and psychological capital in the idea of owning a home. After all, the subprime mortgage business’s supposed raison d’être was making homeownership possible for people who lacked the means — or the credit scores — to get a traditional mortgage. It’s also why bank regulators and politicians were so willing to avert their eyes from the predations and excesses of the subprime companies..."
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Comment: The problem was not the idealization of home ownership. The problem was debt. It is amazing how a host of writers eagerly work to rewrite history to their liking.

Micky Mouse economics

Writes Robert Reich:
"... For three decades, starting in the late 1970s, the biggest economic problem America faced on an ongoing basis was inflation. Demand always seemed to be on the verge of outrunning the productive capacity of the nation. The Fed had to be ready to raise interest rates to stop the party, as it did on several occasions.
During this era of inflation economics, it appeared that John Maynard Keynes - and his Depression-era concern about chronically inadequate demand -- was dead. So-called "supply siders" told policy makers that if they cut taxes on corporations and the wealthy, they'd unleash a torrent of investment and innovation - thereby increasing the productive capacity of the nation. The benefits would trickle down to everyone else.
But the pendulum may now be swinging back to the earlier era in which demand always seems on the verge of trailing the nation's productive capacity. The biggest ongoing threats are chronic recession or even deflation, because consumers don't have enough money to what the economy is capable of selling at full or near-full employment. Despite gains in productivity, little has trickled down to America's middle class.
John Maynard Keynes is being exhumed because his Depression-era worry about inadequate demand is once again the nation's central economic problem.
Keynes prescribed two remedies -- both of which are now necessary: Government spending to "prime the pump" and get businesses to invest and hire once again. And, as Keynes wrote, "measures for the redistribution of incomes in a way likely to raise the propensity to consume." Translated: Instead of big tax cuts for corporations and the rich, tax cuts and income supplements for the middle class..."
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Comment: Robert Reich, even more perfect than Krugman, shows the true dimension of popular economic thinking in the US as the size of Micky Mouse. The decline of economics as an academic disciplines has been going on for decades, yet it is only now, after the outbreak of the recent financial crisis, that the true dimension of the decline becomes visible.

Saturday, June 12, 2010

A problem without solution

BBC reports:
"Japan is at "risk of collapse" under its huge debt mountain, the country's new prime minister has said...
The Japanese government is effectively the only borrower in Japan, and raises all of the money it needs from the savings of its own citizens.
Some 95% of the government's debts are held by Japanese investors, and the government can currently borrow for 30 years at a mere 2% interest rate.
But Mr Scicluna says Japan does have serious medium-term problems related to its ageing population.
As more and more Japanese citizens retire in the next few years, they are likely to start selling their government bonds to pay for their retirements.
This means that Japan will need to start borrowing from the rest of the world, and the government may have a hard time convincing foreign lenders to let it borrow at such a low interest rate...
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Comment: Slowly but certainly, and at an ever higher price, Japan is paying for the exuberance of the 1980s when the Japanese central bank kept interest rates artificially low seemingly justified by low inflation, when in fact the official price index was the result of manipulations of the crudest kind.

Ignorance writ large

June 11 (Bloomberg) -- European banking shares indicate a Greek debt default may be just a matter of time.
Investors have already pushed down financial stocks enough to imply the “erosion” in book value that may result from losses tied to a sovereign debt restructuring ...
A $1 trillion aid package from the European Union and International Monetary Fund may delay a Greek default and give Spain, Italy and possibly Portugal time to get their finances in shape, averting a wider contagion, analysts said. Greece’s debt burden is likely to prove unsustainable, said Thomas Mayer, Deutsche Bank AG’s London-based chief economist.
“Deficit reduction alone doesn’t solve the debt issue,” Mayer said in a telephone interview. He estimates Greece’s debt will rise to 150 percent of gross domestic product following the country’s austerity program, from 120 percent. “Hardly anyone I know believes they can carry it out and still not restructure. This is basically the expectation across all asset classes.” ...
A Spanish or Italian cancellation of payments would dwarf a potential Greek default. European banks’ claims on Spain totaled $832 billion at the end of 2009, while those on Italy stood at $1.02 trillion, according to figures from the Bank for International Settlements in Basel, Switzerland. That compares with claims on Greece and Portugal of $193 billion and $240 billion, respectively...
EU banks could absorb losses on government and private debt in Greece, Portugal, Spain and Ireland without having to raise funds, Moody’s Investors Service said in a report today, after surveying more than 30 lenders in 10 nations. The value of private loans such as mortgages and business credit is greater than that tied to government debt, Moody’s said, adding that any losses on private loans would be absorbed over several years.
“Based on our stress test, we believe that these banks would be able to absorb the losses that could arise from such exposures without requiring capital increases -- even under worse-than-expected conditions,” the credit rating company said...
French banks had claims on Greece of $78.8 billion at the end of 2009, the most of any country, according to BIS figures. In Germany, where banks’ Greek claims totaled $45 billion, the risks probably lie mostly with Landesbanks and government-owned lenders that aren’t publicly traded ...
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Comment: Even if Greece should default, which is rather unlikely, the risks for the eurozone is limited. I still regard the Greek drama as a Greek comedy with the attack on the euro coming from speculators with more money than brains who are seduced by some pundits who have no idea what they are talking about and whoose ignorance equals their prominence.

Better heed Jim than Carl

"... Greece will eventually default on its debt because the country is highly indebted and the euro zone's approach towards saving it is the wrong one, Carl Weinberg, chief economist at High Frequency Economics, told CNBC Friday.
A restructuring of Greek debt could happen as soon as August, when the Balkan country is due to receive another tranche of funds from its lending agreement with the International Monetary Fund (IMF) and the European Union, according to Weinberg...
But famous investor Jim Rogers said now may be a time to buy the single European currency, as there are so many investors who are bearish about it that a rally may be in the making..."

Thursday, June 10, 2010

US can't afford a strong dollar

WASHINGTON (AP) -- The U.S. trade deficit rose to the highest level in 16 months as exports fell for the second time in three months, a potentially worrisome sign that Europe's debt troubles are beginning to crimp American manufacturers...
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Comment: We're groing back to the old ways that brought us into the current trouble.

Tuesday, June 8, 2010

Solid assessment

June 8 (Bloomberg) -- Deutsche Bank AG pushed back its forecast that the euro will strengthen to $1.35 to the first quarter from the end of this year, saying the common currency may first drop to as low as $1.15.
“We see risk aversion driving the dollar higher over the summer, but expect dollar weakness beyond that,” Bilal Hafeez, chief currency strategist in London, said today in an investor report. “We therefore maintain our bullish profile for the euro for the second half of 2010, though we extend the time needed to reach our $1.35 target.” --
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Comment: A prognosis that may well come true, albeit without the detour.

Keynesian endpoint

June 8 (Bloomberg) -- Nations have reached a “Keynesian endpoint” as exhausted balance sheets leave policy makers with few options to bolster economic growth, according to Anthony Crescenzi, an investor at Pacific Investment Management Co., the world’s largest bond-fund manager.
“Time, devaluations, and debt restructurings might be the only way out for many nations,” Crescenzi wrote in an e-mailed note titled “Keynesian Endpoint” that referenced the Great Depression era economist John Maynard Keynes. Debt-fueled spending programs aimed at combating the global financial crisis of 2008 are among policy tools now “being seen as a magic elixir that has morphed into poison.”
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Comment: The world is full of dirty shirts, right, that is why people flee into gold, the only true money, because it is not debt.

Monday, June 7, 2010

EFSF

A new term to learn: EFSF - European Financial Stability Fund
Here's a sketch how it is supposed to work:
June 7 (Bloomberg) -- European finance ministers put the finishing touches on a rescue fund being backed by 440 billion euros ($526 billion) in national guarantees, seeking to halt the spread of Greece’s debt crisis.
The European Financial Stability Facility would sell bonds backed by the guarantees and use the money it raises to make loans to euro-area nations in need, the finance ministers decided today in Luxembourg. The new mechanism would sell debt for lending only after an aid request is made by a country.
The ministers aim for ratings companies to assign a AAA rating to the facility, whose bonds would be eligible for European Central Bank refinancing operations. The entity will be based in Luxembourg...
The fund, being created for three years, is the main part of a 750 billion-euro aid package that European Union finance ministers hammered out a month ago to combat a sovereign debt crisis. Another 60 billion euros will come from the European Commission -- the EU’s executive arm -- and 250 billion euros from the International Monetary Fund....
All euro-area countries plan to be shareholders of the European Financial Stability Facility, or EFSF. The holding of each country will correspond to its share of the ECB’s capital...
To ensure the highest credit rating for debt sold by the facility, the finance ministers approved a 120 percent guarantee of each country’s pro rata share for each bond issue, according to the statement...
 In addition, the ministers authorized the creation, when any loans are made, of a “cash reserve to provide an additional cushion or cash buffer for the operation of the EFSF,” according to the statement...
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Euro zone countries implement mega bailout fund

LUXEMBOURG (AP) -- Eurozone nations on Monday started setting up a massive bailout fund that could rescue any member of Europe's currency union from default, aiming to soothe market jitters that have sent the euro to a new four-month low against the dollar.
The "shock and awe" financial rescue package from the European Union and the International Monetary Fund will total euro750 billion ($1 trillion) -- money that can be lent to any indebted eurozone nation risking default, and intended to counter investor fears that Spain, Portugal or others could follow Greece in requiring a bailout to meet debt repayments.--
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Comment: The fund is meant never to be used to the full. The real test will come when indeed a country needs a complete bailout. Either the plan succeeds and the countries close to bankruptcy adjust or the whole of Europe goes down the drain with dramatic effects on the rest of the world.

The other side of the euro weakness

June 7 (Bloomberg) -- German factory orders unexpectedly jumped for a second month in April as the weaker euro boosted export demand and companies increased investment.
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Comment: A paradoxical situation, indeed, because it is mainly the US economy that would need an export boost.

Sunday, June 6, 2010

Beyond reason

Like the rest of the financial market, the foreign exchange market, too, is prone to prolonged periods of irrationality when emotions ride high and reason runs low. This is currently the case. Foreign exchange markets turn a blind eye to the problems that plague the dollar and ignore the fact that as of now it is mainly only the Europeans who earnestly adress their debt problems, not only in those countries that are under immediate threat of default such as Greece or Spain, but Germany as well. In the meantime the pundits in the US drum the mantra of more and more spending. Financial markets always have focused on the short run but recently this shortsightedness has turned into blindness. In an environment like that profit chances have never been higher for those with some patience and a long-term view.
Going short on dollar bonds and long on the euro emerges ever more clearly as the most profitable investment strategy for the time to come.